Mitigating Risks

Political

Political risk can have a negative impact during the entire project cycle and can take a variety of forms, including:

• Political instability
• Disagreements between various public sector actors involved in the project over technical aspects or plain political opposition
• Differences between a mayor and municipal council are common and can affect project implementation
• Accusations of corruption from involved officials

Create a broad political consensus based on a long-term vision for the project area. Create a project advisory board for supervision.

Financial

Constraints on economic management can be posed by fiscal and foreign trade imbalances; economic volatility and extremes; health of the country economy; and quality of economic management. Other financial risks include:

• Exchange-rate (for foreign capital) risks
• Interest-rate risks
• Inflation risks
• Counterpart risks

The negative impact of some of the risks can be reduced with financial products available on the market. For example, project risks related to the quality of capital investments (such as delays in the delivery of inputs, quality defects of materials and execution of construction, and even the impact of natural disasters) may be covered by insurance.

The foreign exchange risk may be covered by financial instruments, such as hedging offered by international financial institutions. The use of these instruments allows for the pricing of risks and including them in the financing plans.

Access to insurance and other forms of hedging depend on how developed the financial markets are in the country.

Technical

What is the level of dependence of project design on untested or unfamiliar technologies or processes? Is there a lack of local technical expertise for project management, design aspects, and the structure of PPPs?

Local governments can hire technical experts as needed to support project implementation.

Environmental

One of the main risks affecting economic viability for some urban regeneration projects is that of unknown environmental hazards resulting from former site use(s). Remediation experiences of former industrial sites have shown that the magnitude of these contaminations can be extraordinary, often aggravated by having crossed property boundaries and harmed third parties. In other cases, the proven contamination is much less serious than had been feared. The cost of dealing with past environmental liabilities can be a multiple of property values.

Liability is a particularly important issue. It is considered by many to be the main barrier to urban redevelopment, especially in brownfields. Indeed, it can affect the process in several different ways. For the land owner, contamination that is a threat to human health or the environment can potentially bring with it civil lawsuits or government fines. For a developer, liability can mean that future revenues and profitability of redevelopment can be affected by potential legal costs stemming from people’s exposure to contamination that was not removed or identified.

For a lending institution, potential defaults on loans can mean that the institution will be stuck with a site it cannot easily resell because of environmental issues.

For an insurance company, the risks of complicated or unknown pollution are often too high for them to become involved in the process.

For a local authority, liability is often what prevents the redevelopment, as private partners become reluctant to get involved.

Good mitigating practices include (a) incorporating environmental issues in technical feasibility studies and consultation processes with the community and stakeholders; (b) obtaining required approvals by relevant regulatory bodies; and (c) designing an action plan and remediation strategy and identifying sources of financing.

Land ownership and regulation

Ownership and legal covenants can bring with them a number of problems. If the site is in private or mixed ownership, the owners might change their minds during the process, bringing the redevelopment to a halt or delaying it. Similarly, an incoherent legal framework can hamper redevelopment goals and can push costs beyond initial assessments. Changes in the land-use plan and/or the development scheme can make the project infeasible for the developer. An unreliable or inconsistent performance by regulators can create inconsistencies that affect project efficiency.

To counter ownership and legal covenant hurdles, good legal specialists should be hired. Solid contracts should be signed with all vested parties. Government rules and regulations may change mid-project (often with a change of government), but conditions at the time of signing should be kept through project implementation—unless new rules prove to be more favorable.

Stakeholders

Project stakeholders’ views about how the project meets or conflicts with their priorities and needs is another risk, as is opposition from neighborhood groups.

• How do the various categories of stakeholders view the project?
• How are their needs or views being taken into account? Are there any outstanding or contentious issues?
• Is there any participatory planning mechanism involved?
• Is there a possibility that investment benefits will not be shared equally among social groups, especially between women and men, indigenous peoples, ethnic communities, and other disadvantaged groups?

Stakeholder risks can be reduced through a transparent and participatory process to determine the project’s goals, components, and investment priorities. The involvement of key stakeholders in program decisions increases the likelihood that their interests will be reflected in project design. It also reduces the incidence of opposition during project execution.

Implementation (fiduciary risk)

What is the extent to which there is a comprehensive and credible budget linked to the project? This includes a sound procurement law and generally good procurement practices and good contract management in the public sector.

Well-planned procurement and a clear plan for implementation are key to mitigating this risk.

Commercial

What is the risk of selling the redeveloped properties?

The long development and implementation period of an urban regeneration project faces commercial risks that are difficult to mitigate, particularly those related to changes in the business cycle that affect demand, rate of sale, and real estate prices.

When facing problems that normally lead to falling demand or prices, developers often slow execution, delaying implementation of projects under preparation.

Other commercial risks such as late payments by property buyers may be reduced by transferring mortgages to third parties or by obtaining mortgage insurance.

This type of risk is difficult to contain. Developers can conduct realistic market studies to try to minimize it. The analysis of different city growth scenarios and their impact on the commercial aspects of the program allows developers to fine tune the sizing and phasing of investments. This helps to minimize the adverse effects of changes in the economic cycle.